Technology

Google's New Cell-Phone Universe

Its Open Handset Alliance, including Intel, Motorola, and T-Mobile, could threaten Symbian and Microsoft—and redouble investments in mobile software

Building a better mobile phone is a costly, time-consuming business. Whether it's crafting the chips that power phones, the handsets that hold the pieces together, or the software that runs the features, companies around the world have been at it for decades, but few manage to get it right.

Leave it to Google (GOOG) to try to speed things along. On Nov. 5 the owner of the world's largest search engine announced the creation of the Open Handset Alliance, a group of 34 companies that will create a package of free software that includes everything needed to run a cell phone: an open-source, Linux-based operating system, a Web browser, and a slew of applications, including maps, e-mail, and video-sharing and -viewing tools.

The Alliance includes some of the biggest names in tech, including chipmakers Intel (INTC) and Qualcomm (QCOM), handset maker Motorola (MOT), wireless carriers T-Mobile and Sprint Nextel (S), and e-commerce provider eBay (EBAY). The new platform will be known not as Gphone, as had been widely expected, but Android—as in a machine made to resemble a human—after a company acquired by Google in 2005. And Alliance partners aren't the only ones that get to contribute. As its name suggests, Open Handset Alliance will introduce a toolkit that will let independent programmers build mobile software and services for Android-based cell phones. Google will in turn make that third-party software available to users through an online store.

The creation of the Alliance reflects a sea change in the way cell phones are built (BusinessWeek.com, 10/29/07). Cell-phone carriers and handset makers are slowly losing their grip on mobile-phone design, and third-party developers are gaining sway over the features and tools used by the world's billions of cell-phone subscribers. "They've got an excellent Big Bang," Richard Doherty, director of consultancy Envisioneering Group, says of Open Handset Alliance.

Pulling It All Together

Google's effort is hardly the first upstart attempt to build a new operating system for cell phones. Microsoft (MSFT) has created variations of its Windows OS for mobile phones, Nokia (NOK) knit together a consortium through its Symbian effort, and there are at least 22 flavors of the Linux operating system for mobile phones. The Open Handset Alliance represents a potential rival for Microsoft and Symbian. It could also one-up the fractured Linux efforts. A developer hoping to create a hot new tool for Linux needs to rewrite an application for each variant. The other major Linux consolidator, a consortium called LiMo, focuses on software in the guts of the phone. But the Open Handset Alliance will deliver a more complete package.

Startups already are itching to contribute to the Alliance's efforts—and investors are eager to fund them, says David Helfrich, managing director and co-founder of Garnett & Helfrich Capital. "You'll see hundreds of millions if not a billion dollars invested" in mobile Linux software startups, says Helfrich, whose firm has about $350 million in private equity. Among Garnett's holdings is Linux software maker Celunite. Helfrich says he'll invest $12 million to $50 million this year in mobile-Linux-related companies. "We see it as a huge market that represents billions of dollars of opportunity," Helfrich says.

The draw for developers is clear: Unlike with other mobile-platform providers, developers working with Android pay no licensing or other fees. They also will be able to sell their applications through a Google-created online marketplace without sharing revenues with the search giant. Google will make money on the ads served through the phone's browser, according to Google. Then there's the inherent PR of being associated with Android, some programmers say. "This is like a big marketing campaign for us," says Steve Chambers, president of the mobile and consumer-services division at Nuance (NUAN), which will make its basic voice-recognition program available to Android developers for free. "This will be a great way for us to seed the developer community."

Existing wireless handset makers and carriers also have incentive to back Android, which will be available to them for free. A handset manufacturer would need to invest more than $200 million to move to a new software platform, estimates John Bruggeman, chief marketing officer at Linux software company Wind River (WIND).

Unheard-of Scale

Andy Rubin, head of the Android project at Google, hopes that within five years, "hundreds of millions" of Android-based phones will be sold per year. After five years of effort, Microsoft ships about 20 million phones based on Windows Mobile each year. And Microsoft already works with more than 160 operators and 48 handset makers and offers more than 18,000 applications for Windows Mobile.

Is Rubin's dream doable? "It's unclear how they plan to get to that kind of scale," says Scott Horn, general manager for mobile communications at Microsoft. He's not the only doubter. "Let's not underestimate the complexity of this industry," says Sebastian Nystrom, a director at the technology strategy unit at Nokia. "The problem is not to just develop a device but to get it out into the hands of consumers." Indeed, the success of the Open Handset Alliance' ultimately hinges on whether consumers will bang on stores' doors asking for Android-based devices, says Envisioneering Group's Doherty.

These 34 companies believe the demand will be there. Handset maker HTC, known for stellar design and popular phones like the Touch, long pushed Windows Mobile before becoming part of the Open Handset Alliance. "Our commitment to other operating systems won't be changing," said CEO Peter Chou during a conference call announcing Android. Another supporter, Motorola, has been a user of Symbian. Its most popular smartphone, the Motorola Q series, runs on Windows Mobile.

There's a good reason why handset makers are listening. By not having to pay licensing fees to Symbian or Microsoft, cell-phone companies will save about 10% of their costs, according to Google. "They can spend that money on better components and bigger screens," says Ross Rubin, an analyst at consultancy NPD Group. Or they could simply make better phones available to consumers for less. "[The Open Handset Alliance] is a monumental development," says Helfrich. "This is going to be the event that people remember."